Back in April 2019, South Korean carriers took the lead in launching 5G and achieved first success. For example, LG U+ has posted year-on-year growth in wireless services revenue for 13 consecutive quarters, reversing the contraction seen prior to 2018. Financial reports from the carrier reveal that its wireless services revenue increased 14% in the first quarter of 2022 compared to 2018. 2019 Q1, shortly before 5G was launched commercially.
Difficult to imitate the Korean model?
South Korea’s 5G development model is often considered difficult to replicate for two main reasons.
- First, for network deployment, South Korean carriers seem to have invested heavily in achieving fast nationwide coverage, regardless of high capex. This is not how most carriers handle network deployment.
- Second, because South Korean carriers are part of a large group, they can run in-house content platforms and invest heavily in original content. This is out of reach for many carriers.
Let’s look at LG U+ as an example of a carrier that has adopted an “invest early” strategy:
- Early launch: Back in the early days of LTE, LG U+ was able to launch LTE about 6 months before KT, which allowed it to attract the most LTE subscribers in the first few months and increase its overall market share.
Figure 1: LG U+ took the early lead in LTE launch in Q3 2011 (Source: LG U+ 2012Q3 Financial Reports)
- Early implementation: As shown in Figure 2, despite LG U+’s high wireless CAPEX intensity (20% – 30%) in the first four years of LTE, this number dropped to 14.3% if we look at the average intensity over the LTE period of 2011 to 2018 – a modest number compared to the average global capital expenditure intensity of around 16%. With this strategy, Forerunner’s investment in the first four years of LTE has resulted in seven years of continued growth in wireless services revenue. Since 2019, 5G has led a new round of wireless service revenue growth.
Figure 2: LG U+’s wireless capex intensity and wireless service revenue over the past 10 years (Source: LG U+’s 2010-2021 financial reports)
Note: Wireless CAPEX intensity = Wireless CAPEX/Wireless Service Revenue
South Korea’s fast nationwide coverage also benefited from the country’s population distribution. South Korea ranks 24th in the world in terms of population density, according to the World Bank, with a large proportion of the population living in the Seoul metropolitan area (nearly 50% of the population) and the six largest metropolitan cities. High population density and concentration made it easy for carriers to quickly achieve national coverage.
As the network has been widely deployed, three monetization methods have emerged that carriers can start right away:
- traffic monetization, As represented by Chinese carriers: 5G packages offer more data allowance at lower prices per gigabyte for an incremental ARPU. The primary driver is the gap and room for growth between the average 4G DOU (~10GB) and the 5G DOU (>30GB).
- device upgrade, As represented by US carriers: On average, people replace their phones every 3.2 years, which means that about 30% of cell phones are replaced each year. When users trade in their phones, carriers can use the opportunity to encourage them to upgrade to a 5G package.
- content and service, As represented by South Korean telcos: South Korean telcos use 5G services and content as one of the main drivers for migrating 5G users.
Carriers often apply multiple methods from those mentioned above. For example, carriers in South Korea are also using hardware upgrades, while carriers in China are also investing in content and services.
1. Traffic monetization
In most 5G markets, 5G entails a much higher DOU than 4G (Figure 3). Increased traffic is what 5G companies can monetize right away.
Figure 3: 5G users consume twice as much data as 4G users (Source: OpenSignal, June 2021)
O2 Germany, which operates in a market where average monthly mobile data usage is somewhat lower than in Europe, is using 5G as an opportunity to grow and monetize traffic (see Figure 4).
- In February 2020, the carrier introduced 5G-ready packages with no pricing change but doubling the data allowance. Unlimited tiered data plans are also offered.
- In October 2020, O2 Germany launched 5G commercially, shifting 5G ready packages.
- In August 2021, the carrier expanded 5G to FREE M packages.
Figure 4: O2 Germany’s cutting-edge packets that increase data traffic
In the third quarter of 2021, the monthly DOU for postpaid users at O2 Germany reached 11 GB, the highest level in the market, indicating initial success for the carrier’s goal of increasing traffic.
To better support user traffic growth in the 5G era, O2 Germany has implemented an exceptional program of “Investments for Growth”, starting a virtuous cycle of increasing traffic revenue for accelerated network deployment.
Figure 5: O2 Germany mobile services revenue growth, OIBDA, and capital expenditure over the past three years (Source: O2 Germany financial report in 2019, 2020 and 2021)
Note: OIBDA (operating income before depreciation and amortization) and capital expenditures are both comprehensive numbers.
2. Upgrade the device
In November 2021, T-Mobile US CEO hails 5G smartphone as first 5G killer appbuoyed by the dominance of US carriers in smartphone distribution and the window of opportunity to connect users to cutting-edge 5G packages using smartphone subsidies.
For example, AT&T introduced a subsidy of $1,000 (the price of the iPhone 13 Pro) to trade in several older phone models on the condition that users subscribe to its premium unlimited plan. The trade-in and upgrade program was largely driven by the iPhone 12’s halo effect and user intent surveys.
In the US market, carriers are the main distribution channel for smartphones, with Apple occupying more than 60% of the smartphone market. Apple’s first 5G phone, the iPhone 12, was powered by ‘supercycle’ 5G. In addition, new mobile phones are the primary driving force for US Internet users to upgrade to 5G (Figure 6). 10% of mobile users replace their phones within 12 months, and 24% do so within 18 months. They are the main target early adopters of 5G migration.
Figure 6: Top reasons US users are upgrading to 5G (Source: YouGov, June 2021)
This wave of device upgrade has led to a rapid increase in 5G users for the big three US carriers. By the end of 2021, the total number of 5G users in the United States has exceeded 50 million. Today, smartphone subsidies are still common practice in many markets where carriers serve as one of the main smartphone sales channels. However, it’s important to note that while support may be tempting, the real foundation remains the 5G network experience. This is why US carriers are scrambling to fill in the gaps by bidding for C-band and investing in C-band networks..
3. Content and Services
5G offerings need to be tangible to encourage the transition of 5G users, which is why 5G content and services are needed. In addition, 5G content and services help ARPU as the price of data traffic drops every year.
Against the background of South Korea’s strategy to become the main source of popular culture, South Korean carriers have been investing heavily in and innovating content and services since the 4G era. While running their video platforms, they’ve also invested heavily in content acquisition and production. For example, LG’s U+ strategy for mobile video in the 4G era was considered a great success.
American airlines used to be ambitious in this area. AT&T acquired Time Warner and Verizon acquired AOL and Yahoo, the Verizon Media problem. However, they have changed course and have now fully embraced OTT services.
Figure 7: Vertical integration and OTT collaboration of US carriers
Obviously, own and operate is not the only approach for carriers. Even South Korean carriers are also actively working with third-party service providers in 5G. LG U+ cloud games and augmented reality services for kids are based on Nvidia’s GeForce Now and Bookful from InceptionStraight.
Figure 8: LG U+ working with Inception/Bookful on AR services for kids
Carriers can also adopt the white label partnership model. For example, Sunrise from Switzerland works with a partner that provides game content and a cloud gaming platform (including software and hardware servers), while Sunrise itself focuses on marketing and operation. There are a number of ways to Rome to launch 5G services: Telecom companies can choose an OTT (“EASY”) partnership model or a content production (“HARD”) model. Their specific choices depend on a few factors including the local market (eg, OTT service uptake), organization and experience (eg, content teams), among others.
Figure 9: Different service delivery models for carriers
The main takeaway for operators
More than three years after the first commercial launch of 5G, leading carriers in East Asia, the Middle East and Europe have crossed the gap and built a large 5G user base (about 20% of 5G users). Business performance indicators for telcos show that the growth of 5G users has driven average revenue per user (ARPU), mobile service revenue, and EBITDA margins. With the accelerating global uptake of 5G, carriers can start recruiting 5G users by providing more data allowances, faster speeds, and more offers (5G content and services) without waiting for the so-called 5G killer apps, so as to achieve the first wave of membership. growth.
The early success stories of leading 5G carriers around the world provide two outcomes for the success of the 5G business. First, the 5G network experience remains key. No 5G upgrade or upgrade would be possible or sustainable without convincing network speeds and coverage. Secondly, 5G content and services are key. Carriers must choose appropriate paths that range from low-threshold models such as third-party partnerships to higher-threshold models such as content co-production.